When you accepted your job, you may have not read the fine print of your employment contract and might have signed away more rights than you realized.
One in five American workers have signed a noncompete clause in their employment contract. And many likely had no idea what they were agreeing to or its impact on their future employment.
Earlier this spring the Federal Trade Commission banned the use of noncompete clauses in employment contracts for most workers. But the ban is facing a lot of legal challenges, and is far from being in effect.
Noncompete clauses typically prevent workers from joining competitors for a certain period of time after their employment. Many people are only vaguely aware of these clauses or assume that they are only used in highly lucrative, competitive, or secretive industries. But they actually apply to a surprising number of jobs, including low-wage jobs, with far-reaching effects.
In fact, the F.T.C. claims that the ban on noncompete clauses would generate extra job opportunities for as many as 30 million employees, and raise wages by $300 billion dollars.
On this week’s episode of The New Way We Work, economist and professor Evan Starr explained both sides of the arguments for and against noncompetes, and the impact they have for employees.
What exactly is a noncompete agreement?
A noncompete clause is typically just a few sentences in an employment contract that stipulates that when the worker leaves, they can’t go join or start a competing business. These clauses can have a lot of variations, including how long the employee can’t work for a competitor (from a few months to a few years), the geographic area (a few miles to the whole country), and what constitutes a competing business. (For instance, in a case of Jimmy John’s workers it was any food shop that makes 10% of their revenue from “sandwich like items.”)
While some employees are aware of what they are signing, many are not. The clauses can be as short as a few sentences long and can be hidden anywhere in the stack of paperwork new employees sign. In fact, Starr and his colleagues conducted an experiment where they put a noncompete clause on page 7 of a contract and found that 75% of the individuals who looked at the contract spent less than 10 seconds on the noncompete page, and about a third of them skipped it entirely.
The history of noncompete agreements
Noncompete clauses are far from a modern invention. Starr points out that they were first used in the 1400s, when master craftsmen trained apprentices for many years and didn’t want those apprentices to leave and compete with them once they were trained. But the legal challenges started soon after, for much the same reason as they do today: that noncompete agreements “prevent a worker from providing a valuable public service and earning a living with their skills,” Starr says.
Still, a 1711 case ruled that noncompete agreements were ultimately good for both businesses and employees, as they incentivized master craftsmen to train apprentices. As the United States became a country, we brought over this common law from Europe. But in the 1800s, several states, including California, Oklahoma, and North Dakota, started banning noncompete agreements.
The argument for the clauses is that they are important to innovation because they make a company to want to invest in their workers, share proprietary information, and develop trade secrets. Yet, as Starr points out, noncompete agreements have been banned in California for 200 years and yet plenty of tech innovation has thrived in Silicon Valley. Why?
“If every company has those private incentives, then [the] kind of labor market we get is one where workers are not starting new companies. They’re not pursuing ideas,” Starr explains. “Companies are not able to hire the workers that they want to hire to pursue new innovations. The companies themselves are in their own way; even though they’re doing what is optimal for them from a social perspective, we’re all worse off.”
What happens next with the FTC’s proposed ban
The FTC has been sued by three parties, including the Chamber of Commerce. A judge in Texas is overseeing the case and is expected to rule by early July. If the FTC wins, all current noncompete agreements would be voided and new agreements would be banned starting in September.
Starr says he believes the FTC will win because the evidence that the agreements harm employees and innovation is there. “When states begin to enforce noncompetes more vigorously, innovation falls,” he says.
Listen to the full episode for more on how noncompete agreements impact wages, what other tools employers can use to protect trade secrets, and more.
You can listen and subscribe to The New Way We Work on Apple Podcasts, Google Podcasts, Stitcher, Spotify, RadioPublic, or wherever you get your podcasts.
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